This article is brought to you by Morningstar.
Asset class recap of March quarter 2020
Global shares
- Global sharemarkets initially strengthened, with some markets such as the U.S, pushing to record highs in February before plunging for the reminder of the quarter as coronavirus related fears of economic slowdown, together with plummeting oil prices, led to double digit losses being recorded across all regions. The U.S sharemarket was amongst the worst performers, recording a loss of -20% for the quarter and wiping out all of its gains in 2019. Fear and uncertainty dominated investor sentiment, which triggered indiscriminate selling and resulted in all global sectors recording negative returns. However, the worst performing sector was energy, which reflected the mammoth 54% decline oil prices (Bloomberg Sub WTI Crude Oil, TR, USD).
- Losses for the quarter swamped 1-year returns, with global sharemarkets recording a loss of 10% for the 1-year period (local currency return).
- Currency impact: The Australian dollar (AUD) weakened against the U.S. dollar (USD) over the quarter, in part reflecting the more aggressive monetary policy reaction (cutting rates and buying bonds) from the US Federal Reserve; and in part reflecting the US Dollar’s status as a safe haven currency that is preferred by investors during periods of market stress. The weakness of the AUD provided a significant boost to unhedged international equity returns as global shares fell by -20% in local currency terms, and by a smaller -9% in Australian dollar terms.
Australian shares
- The Australian sharemarket experienced considerable volatility through the quarter, pushing to record highs in the early part of February before plunging as concerns over the coronavirus impact on global economies escalated. The S&P/ASX 200 Accumulation Index recorded some of the largest one-day declines on record before ending the quarter with a loss of 23%, reversing almost 4 years of gains to end at levels last seen at the start of 2016. The magnitude of losses for the quarter weighed heavily on 1-year returns, which fell by -14%. While sharemarket losses were significant for the period overall, volatility was also high, with meaningful gyrations occurring within a single trading day.
- On a sectoral basis, losses were recorded for all but one sector, with the most significant loss posted by the energy sector which fell by a whopping 48% owing to the sharp plunge in oil prices. The best performing sector was healthcare, which managed to eke out a 1.5% return, reflecting the increased demand for medical services and products stemming from the global health crisis.
Bonds
- Global and Australian bond markets delivered positive returns for the quarter, reflecting the decline in government bond yields, as central banks around the world cut official interest rates. In Australia, the cash rate was cut to a record low of 0.25%, and in the U.S, rates were cut to 0-0.25%. We also saw the central banks of Australia, the U.S, Europe, and England implement other policies aimed at supporting and stimulating economies and financial markets.
- The modest gains from bonds helped to buffer some of the impact on portfolio returns as most other key asset classes fell.
Global Property
- Global listed property ended the quarter with a 34% loss and the 1-year period with a 25% loss. With the sharp decline in global demand for travel and leisure, the immediate impact on hotels and malls was severe; while the office sector was hit by poor sentiment related to higher expected vacancies.
Global listed Infrastructure
- Like listed property, listed infrastructure has seen meaningful declines, of approximately 28%. Within infrastructure, the assets that are more exposed to the economic cycle, like airports and tollroads were the hardest hit by the travel and social distancing restrictions
Staying the course is important for building long term super savings
It is too early to assess whether the coronavirus outbreak will have a long-lasting negative impact on the global economy, but we believe immediate evidence points to a short-term impact (assuming health officials are successful at containing the outbreak). If the impact is short-term, price declines created buying opportunities that we were actively taking advantage of during the quarter.
Markets could remain volatile for some time. While it may feel uncomfortable for members to see short term gyrations in their super balances, it is important to stay invested through this turbulence. Why? Because it is difficult, if not impossible, for anyone to pick the bottom of the market. Staying invested means that you can benefit from the rebound; by contrast, cashing out too soon means that there is a good chance of missing out on the recovery. We have already seen this happen, with sharemarkets falling sharply for most of March. However, in the final week of March and into April, sharemarkets have staged some spectacular gains, which have come as a welcome relief to those who have stayed invested. By contrast, if you had moved to cash at the weakest point in sharemarkets, you would have missed out on the 20% gain we have seen so far in U.S equities, 14% in Australian equities, and 10% for global sharemarkets (in Australian Dollars). Data is correct at the time of writing: 14 April 2020.
Changes to the Balanced Portfolio over the March quarter
To paraphrase one of Warren Buffett’s most famous quotes: ‘be fearful when others are greedy and greedy when others are fearful’.
Heading into this period of volatility, we had been positioning our portfolios away from the most expensive asset classes and markets, such as Australian and U.S sharemarkets, favouring better priced investments and cash. You could say we were fearful when others were greedy.
The selloff in sharemarkets during the March quarter was severe and saw all sectors and regions lose value, regardless of their underlying investment merits. As valuation-driven investors, this created an opportunity for us to buy assets that were cheaper than what they were at the start of the year, indeed, some markets were not been this cheap in years. As a result, we were actively buying beaten-up assets that have attractive long-term expected returns. You could say we were greedy when others were fearful.
Key changes:
- We have taken the opportunity to increase the portfolios exposure to Australian shares and global shares. We have been targeting those sectors that seen dramatic price declines, such as the U.S energy sector which has had price declines of more than 50%, and have also added to US financials.
- We have taken profits on the portfolio’s Australian bond and global bond holdings.
- Overall, this has resulted in an increase in the portfolios growth holdings and a decrease in the portfolios defensive holdings.
Importantly, the Balanced portfolio still has healthy cash holdings which will continue to offer a buffer against further equity market weakness while providing us with the opportunity to further buy beaten up assets, with attractive long term expected returns.
It is likely that markets will be volatile and uncertain about the coronavirus impacts for some time, and we know that uncertainty can be uncomfortable. However, as a long-term valuation driven investor, we believe it is important to separate permanent damage, which will impact what a company or asset is worth over the long-term, versus temporary damage, which will be forgotten. We focus on how much an asset is really worth, and with this, we regard the volatility as an opportunity to buy quality assets at heavily discounted prices.
We believe the portfolios are well positioned to benefit from sharemarket gains from here, as we took the opportunity to add to good quality equity investments when prices were low. Importantly, being invested in the cheaper parts of the market helps to reduce the risk of loss. Should sharemarkets weaken, the portfolios have a well-diversified mix of assets that can help to provide some buffer to overall returns while also seeking to grow the long-term superannuation savings of REI Super’s members.
______________________________________________________
This article is brought to you by Morningstar. This information does not take into account your situation and you should consider if these products are appropriate for you.
The products or services being advertised are provided by third parties, not REI Super and therefore will not be the responsibility of REI Super. REI Super may invest in these third parties but does not receive any payments or commissions from these organisations as a result of members using the products and services. Members should make their own assessment and seek professional advice as to the suitability of such products or services for their individual needs.
The information contained in this article does not constitute financial product advice. However, to the extent that the information may be considered to be general financial product advice, REI Super advises that REI Super has not considered any individual person’s objectives, financial situation or particular needs. Individuals need to consider whether the advice is appropriate in light of their goals, objectives and current situation. Members should obtain and read the Product Disclosure Statement for REI Super before making any decisions. REI Superannuation Fund Pty Ltd ABN 68 056 044 770 AFSL 240569. RSE L 0000314 REI Super ABN 76 641 658 449 RSE R1000412 MySuper unique identifier 76641658449129 April
The information contained in this article does not constitute financial product advice. REI Super does not give any warranty to the accuracy, completeness or currency of the information provided. Although REI Super makes every reasonable effort to maintain current and accurate information, you should be aware that there is still the possibility of inadvertent errors and technical inaccuracies. REI Superannuation Fund Pty Ltd ABN 68 056 044 770, AFSL 240569, RSE L0000314 Trustee of REI Super (ABN 76 641 658 449), SPIN REI0001AU, RSE R1000412. MySuper unique identifier 76641658449129.